Pension pain leaves some cities in a bind

Ormond Beach is one of many cities across the nation faced with skyrocketing pension costs, a legacy of promises made by elected officials many years ago.

CHRIS GRAHAMSTAFF WRITER

ORMOND BEACH — Firefighter paramedic Joe Dupree represents the new reality for government workers who get pensions, an increasing financial burden for Ormond Beach and cities and states across the nation. Dupree worries whether he'll have enough money to live on – or whether there will be any at all — when he retires from the city's fire department. At his current salary, he stands to receive close to $45,000 in annual pension benefits when he retires. "I'm going to have to (keep working), unless I hit the lottery," said the 35-year-old firefighter. For some longtime employees, retirement from the city might be called a lottery of sorts. They represent the old reality, before pension plans started to overwhelm budgets. Former fire Capt. Stephen Bowdre, for example, was bought out by the city 10 years ago. The Ormond Beach resident had 25 years of service with the fire department, worked 56 hours a week and climbed his way to the rank of captain. When the city approached him about taking early retirement, it was an offer he couldn't refuse. This year, the 57-year-old will collect more than $76,000 in pension benefits despite only having a base salary of $59,288 when he retired. "I wasn't going to say no," he said. "I guess I was in the right place at the right time." Should he live to be 70, Bowdre will have collected an estimated $1.7 million during his retirement. "I got lucky," he said.

Ormond Beach is one of many cities in Volusia County and across the nation faced with skyrocketing pension costs, a legacy of promises made by elected officials many years ago. Leaders believe they must find a way to reform the system before it gets out of control and have already started making staff and other cuts. The city's employees, meanwhile, claim any changes made are unnecessary and will wind up being more costly for taxpayers. Bowdre and others retired from their local government jobs with generous benefits in a time when cities offered pay raises and other rewards. "People sold their souls to get elected," said Mayor Ed Kelley, who lost an election in the late 1990s to an opponent backed by the city's firefighter union. After Kelley's defeat in 1997, three commissioners gave firefighters an 18.9 percent raise, an average of $6,020 annually per firefighter. "When money was making money it wasn't a problem," said Jeff Boyle, a former city commissioner who voted for the pay increase. "We had a bad system and didn't know it." About a decade later, the economy tanked. Pension trust funds lost money and tax revenue plummeted, leaving many cities struggling to pay benefits guaranteed to their employees; others – mainly in California — couldn't and have since declared bankruptcy. This year, Ormond Beach's top 20 pension recipients are due a combined $1.2 million, according to city data. Bowdre is third-highest on the list. Longtime firefighter Bill Heric, who suffered a heart attack near the end of his career and received pension disability payments, is second. He receives $90,562 in pension annually. Jay Cuddy, former police division chief, collects $94,217 annually as the highest pension recipient. Attempts to contact Heric and Cuddy were unsuccessful. If all 20 top pension recipients live for another 15 years, they will have collected $18.7 million. That amounts to an average of $60,000 per person each year. The average firefighter retiree receives $38,748 in annual retirement benefits; $33,264 for a police officer. "It is simply unsustainable," Kelley said. It's unlikely employees such as Dupree will ever reach those old inflated numbers, although their pension checks would seem generous to some. But even as cities have tried to cut back, the funding gap has widened over the past decade. In 2000, the city had $4.69 million in unfunded liabilities, which is defined as the future projected benefits owed to members compared to the city's net assets. Today, the city of Ormond Beach is on the hook for $40 million in unfunded liabilities, representing the projected amount of what the city will pay out in pension for all employees currently retired or on payroll over the next 30 years. Florida State University's LeRoy Collins Institute, a pension think tank, recently released a report that found the problem has been several years in the making. "Money is going to have to come from somewhere," said David Matkin, lead researcher for the LeRoy Collins Institute."In the end, it's the taxpayers who are going to be responsible," he said.

Ormond Beach has three pension funds, one for its police employees, one for fire and another for general government employees. Most public sector pensions differ from a typical 401(k) plan or a defined contribution plan, in which employees are at the mercy of the economy. Local governments, though, have traditionally elected to operate a defined benefit plan, where entities pledge a certain amount of money to employees from retirement until death. With that system in place, law enforcement and firefighters take lower salaries to get sweeter deals when they retire. Pension is determined by the number of years worked multiplied by a set number agreed upon during union contract negotiations. In Bowdre's case, he retired with 25 years of service multiplied by a buyout factor of four, meaning he retired with 100 percent of his salary plus any overtime hours accumulated. The problem reached a breaking point during the recession. When stocks plummeted, pension funds lost anticipated interest earnings and the taxable value of properties in cities fell off a cliff, said Olivia Mitchell, executive director of the Pension Research Council at the Wharton School of the University of Pennsylvania. In Ormond Beach, the total gross taxable value of property has dropped by $1.33 billion since 2007. And in Ormond as in other cities, any staff cutbacks to trim the budget mean fewer employees contributing to the pension plans. Also, the number of retirees compared to active participants in pensions is increasing, according to the report by the LeRoy Collins Institute. In 2010, the amount of money paid by cities to retirees was more than the amount contributed for benefits earned that year. "It was a perfect storm," Mitchell said. Since the recession, it has taken time for cities to recover. In 2000, Ormond Beach's pension funds were nearly fully funded, according to data provided by the city's finance office. Today, those pension plans are all less than 80 percent funded, which lately has been considered a benchmark for identifying plans that are in trouble, Matkin said. "They're probably not amongst the very worst," he said. "But they're certainly on the low end."

Ormond Beach is not alone. According to 2011 figures from the state Department of Management Services, Port Orange had nearly $46 million in unfunded liabilities in its three pension funds and has a far worse funding ratio than Ormond in some of its funds – less than 50 percent.Deltona and Daytona Beach had $4.7 million and $56 million in unfunded liabilities, respectively. Those cities' funds, though, are about at the 70 percent funding mark. In 2000, Ormond Beach contributed a little more than $500,000 into its three pension funds. This year's budget calls for the city to contribute about $5.3 million in pension money — a 960 percent increase — which will account for nearly a quarter of all personnel costs and will consume more than half of what the city is expected to collect in property taxes. The city, however, is hoping to cut down on costs, said Ormond Beach's finance director, Kelly McGuire. Officials were able to negotiate a deal with the city's police force that will decrease pension costs by at least $60,000 and maybe more in the coming years. Negotiations are also ongoing with the city's firefighters and general employee workforce, she said. The state has tied the hands of city officials, said McGuire. In 1999, the Legislature passed a law regulating the use of insurance premium taxes collected by municipalities and then used for pension payments. In order to receive those taxes from the state, the city had to enhance benefits to its employees, McGuire said. "There's a point when you have to say enough is enough," she said. Recently, a new interpretation of the law by Gov. Rick Scott's office could allow cities to use those funds without having to raise benefits.

While the city of Ormond Beach hasn't come up with a concrete way to deal with the issue, its workers say the system is fine as it is. "The money is always going to be there," said Ormond Beach police Sgt. James Crimins, who sits on the police department's pension board. He and other union representatives argue police and fire employees contribute a large chunk of their salaries to the pension funds — 9 percent and 8.4 percent, respectively. "It's not like we haven't been paying into the system," said firefighter Joseph King, who represents the city's fire union. Both police and fire employees say they made considerable concessions with the city. Firefighters haven't had a raise in six years while the police union this year made several compromises, including limiting the annual overtime that can be included for pension purposes and eliminating the state's deferred retirement option for new hires. "We understand there's a burden and we understand there has been a downturn in the market," Crimins said. "But there needs to be compromise on both sides."

There is no easy way out from under enormous pension debts, especially for elected officials because of political pressures and short terms in office. Additionally, there is no tried and true way to fix the problem, said Mitchell of the Wharton School. "You either need more money or need to cut benefits," she said. "The question is how to do it in a way that is politically feasible or economically sensible." One approach cities have taken is to raise the retirement age. The city of Port Orange had been in a legal battle with firefighters to raise the retirement age before a ruling in its favor by the 1st District Court of Appeal. Before the ruling, firefighters were able to retire after 20 years of service. That was changed to 55 with 10 years of service or 52 with 25 years of service. Comparatively, Ormond Beach's retirement eligibility requirements are age 60 or 55 with 10 years, or 20 years of service without an age requirement. General employees are eligible to retire when their age and years of service equal 85. Matkin said any economic benefit, though, from raising the retirement age isn't seen for quite a while. "It will be 20 years before you see any effect," he said. The more traditional approach for cities is to opt for a defined contribution system or a combination, Matkin said. But that will likely face the most backlash. "That's going to make employees upset," he said. "Politically, they're not going to go kindly toward that." Indeed, Crimins said the city would be hard-pressed to find well-qualified police officers who would want to work for lesser benefits. "You gotta ask yourself what kind of officers you're going to get if you do that," he said. Crimins added college-educated officers would mostly steer clear of the city. Kelley, who was elected mayor on a platform of pension reform, said he doesn't know what the best solution is to fixing the problem but the commission needs to come to a consensus and soon. "I'm open to suggestions," he said. "We can't keep kicking the can down the road." Matkin said it's better for cities to take care of the pension problem now rather than later. He said as the pension gap grows larger, cities like Ormond Beach could be forced to raise taxes or cut certain services. "The problem is not going to go away," he said. "Somewhere in the future, people will have to deal with it. And it's not an ethical proposition to push the costs that we create onto future generations."

Weak investment returns, staff cutbacks and the 2008 recession have all contributed to a funding gap with Ormond Beach's three pension funds. Here is a breakdown of how much the city owed in 2000 and in 2011 to employees and retirees for a 30-year period: General Employee 2000: $2,988,587 2011: $15,132,399 Police 2000: $1,339,835 2011: $12,336,302 Fire 2000: $363,973 2011: $12,187,977 SOURCE: City of Ormond Beach Department of Finance